Excelerate Energy Inc

NYSE:EE

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the El Paso Electric Company's Third Quarter 2018 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Lisa Budtke. Please go ahead, ma'am.

[Lisa Budtke, Director, Treasury Services and IR]

Thank you, Mike. Good morning, everyone. Thank you for joining the El Paso Electric Company Third Quarter 2018 Earnings Conference Call. My name is Lisa Budtke, and I'm the Director of Treasury Services and Investor Relations.

On the call are; President and CEO, Mary Kipp; CFO, Nathan Hirschi; and other members of senior management. You should have a copy of our press release in today's presentation. And if you don't, you can obtain them on our website.

We currently anticipate that our third quarter 2018 Form 10-Q will be filed with the Securities and Exchange Commission on or before this Friday, November 2. We would also like to inform you that we will be attending the EEI Financial Conference on November 11 through the 13 in San Francisco, California.

Please refer to our website for all upcoming Investor Relations events including the Mizuho conference we plan to attend in December. A replay of today's call will be available shortly after our call ends and will run through November 15. The details as they relate to the replay are disclosed in our press release.

For forward-looking statements on Slide 2 of our presentation, you can see our safe harbor provisions. In summary, our comments and answers to your questions may include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and other factors, which may cause the company's actual results and the future periods to differ materially from those expressed here. Any such statement is based on management's current expectations and is qualified by reference to the risks and factors discussed in the company's SEC filings. Our Annual Report on Form 10-K, 10-Q and other SEC filings contain our forward-looking safe harbor statements and also lay out the risk factors that should be considered. These filings may be obtained upon request from the company on our website or from the SEC.

The company cautions that the risk factors and others discussed in the company's SEC filings are not exhaustive, and we do not undertake to update any forward-looking statements. Any such statements made during our call are subject to such risk and other factors.

On Slide 3, in addition to disclosing financial results that are determined in accordance with generally accounted accounting principles, or GAAP, the company has provided adjusted net income and adjusted basic earnings per share, which are non-GAAP financial measures. Management believes that providing this additional information is useful to investors in understanding the company's core operating performance because it removes the effects of variances that are not indicative of the fundamental changes in the earnings capacity of the company.

Slide 3 contains a description of our use of these non-GAAP measures and Slide 17 provides a reconciliation of the non-GAAP measures to the most comparable GAAP measures.

Now, I'll turn the call over to Mary, who will start on Slide 4.

[Mary Kipp, President & CEO]

Good morning, and thank you for joining us this morning. For the third quarter of 2018, we're reporting net income of $73.3 million or $1.80 per share compared to third quarter 2017 results of $59.7 million or $1.47 per share.

After removing the realized and unrealized net gains on securities, adjusted net income was $66 million or $1.62 per share for the third quarter of 2018, compared to adjusted net income of $58.3 million or $1.44 per share for 2017.

Before Nathan discusses the key earnings drivers in more detail, I want to highlight a couple of items that led to a positive growth in our quarterly earnings. A 1.7% increase in the average number of customers served and favorable weather allowed us to set an all-time record of kilowatt hours sold for any quarter. Kilowatt hour sales increased 4.3% over the third quarter of 2017.

Further, the timing difference between the tax benefit and revenue reduction associated with the Tax Cuts and Jobs Act of 2017 significantly improved earnings during that quarter. Although we reported solid financial results for the quarter, we continued to experience some headwinds due to the completion of some of the generation maintenance work that was started in the second quarter.

As you may recall, during our previous earnings conference call, I described a new initiative that incorporates a more holistic approach to our generation maintenance strategy. This strategy includes a long-term approach that we expect will produce increased efficiencies in our generation maintenance program.

We continue to believe that the current window between prior and future generation resources is the optimal time to implement this strategy and allows us to focus our efforts on this type of work. Although this strategy resulted in higher levels of operation and maintenance expenses in the second and third quarters of 2018, we believe it will help ensure our maintenance program is geared towards providing high levels of fleet reliability in the most cost-effective way possible for the long run.

We currently expect generation operations and maintenance expenses to be lower in the fourth quarter of this year compared to the fourth quarter of 2017. Again, Nathan will discuss the earnings drivers in more detail in a moment.

If you'll now turn to Slide 5, I would like to discuss some of our recent highlights for the quarter. On September 13, we entered into an amended and restated credit agreement. Under the terms of the agreement, the company has available of $350 million revolving credit facility with the term ending on September 13, 2023. We may increase this credit facility by up to $50 million to a total of up to $400 million. We also have 2, 1-year options to extend the maturity of the facility.

On September 29, the company was awarded the first ever Community Partner Award from the El Paso Neighborhood Association Coalition. The award was given to the community in recognition of its continued partnership and community outreach efforts with the city's neighborhood associations. We're proud to have been recognized for our continued engagement with our community and to be recognized for the transparency and openness in our communications.

On October 15, we filed to reduce our existing Texas fixed fuel factor by almost 7% to reflect lower estimated fuel and purchased power cost. The filing affects the fuel portion of rates for Texas retail customers and does not affect nonfuel base rates. The decrease in the Texas fixed fuel factor was approved on an interim basis by the Public Utility Commission of Texas and became effective for the first billing cycle in the November billing month.

Finally, we're pleased to announce that the Holloman Air Force Base Solar Facility became commercially operational on October 18. The output from the 42-acre, 5-megawatt solar facility will be dedicated for use by the base and will help the Air Force meet its renewable and energy security goal. This is our inaugural collaboration with the U.S. Air Force and we look forward to continuing to serve our region through these types of partnerships.

I also wanted to thank our Vice President of Renewables Development, Richard Turner, his team and all the employees who worked so hard to bring this project to fruition.

If you'll now turn to Slide 6, I will provide an update on our current regulatory filings. In Texas, we are seeking regulatory approval to assign an additional 2 megawatts of our current generation to the Texas Community Solar Program. We currently have over 1,000 customers on the waiting list to subscribe to our Texas program, so we're working to expand the program by an additional 2 megawatts. A hearing in Texas has been scheduled for December 4.

We also filed for a New Mexico Community Solar Facility, which would have added 2 megawatts of clean renewable generation to our portfolio. However, yesterday, the New Mexico Commission voted 3:2 to dismiss our community solar filing. We will continue to evaluate our options and work to provide a voluntary renewable option for our New Mexico customers in the future.

Next, I will walk you through our anticipated 2019 regulatory filings on Slide 7. As a result of increasing electricity demand and customer growth, we've determined that a total of 370 megawatts of additional generation resources are needed by 2023. The company issued an All Source Request for a proposal on June 30, 2017. We anticipate that a final decision on the RFP will be made in late 2018.

Our next steps will include seeking regulatory approvals for new generation resources in the second half of 2019. We also plan to file a transmission and, excuse me, we also plan to file a Transmission and Distribution Cost Recovery Factors in the first quarter of 2019. Based on the timelines of other utilities in Texas, we anticipate they may take approximately 6 months to get the cost recovery factors approved. Therefore, we currently anticipate that we will begin receiving rate relief in the second half of 2019.

In New Mexico, in addition to the regulatory approvals we will be seeking for new generation, we also plan to file a general rate case by July 31, 2019.

In March of 2018, the Federal Energy Regulatory Commission issued 2 show cause orders to examine the effect of the Tax Cuts and Jobs Act of 2017. In May, we notified the FERC that no rate reduction was identified and of our intention to prepare a future filing to increase the company's open access transmission tariff rate. Thus, we currently anticipate filing for recovery of an increased transmission revenue requirement sometime during the third quarter of 2019.

Turning to Slide 8. We've begun engaging with our regional stakeholders on a smart city initiative. The smart city initiative is in response to changing customer demand and is part of a trend both globally and nationally to change the way utilities provide products and services that our customers want, while encouraging a resilient electric grid and more sustainable cities.

The backbone of this initiative is advanced metering infrastructure, or AMI, which has become the norm in most of Texas and the U.S. and in fact, many utilities in the U.S. are already deploying the second generation of AMI. By enhancing our visibility into the distribution grid, AMI would allow us to engage in more efficient planning and help reduce outage times.

It would also serve as a platform for more efficient pricing initiatives for our customers by providing options such as time of use rate, real-time view and control of their energy usage and the ability to better value distributed resources.

We look forward to working together with the communities in our region to ensure that our customers are not left behind, are benefiting from improvements in grid technology and are able to take advantage of new consumer technologies that will enhance grid resiliency and increase operational efficiencies.

We believe strongly in these partnerships and the opportunities they provide to foster the economic prosperity and stability of our region.

We also look forward to seeking legislative approval regarding this technology during the upcoming legislative session in Texas, which convenes in January of 2019. The new legislation would provide some clarity regarding cost recovery for the implementation of advanced metering infrastructure in our service territory.

Ultimately, we would like to be in a position to seek regulatory approval for these initiatives in Texas and New Mexico in 2020 and then begin a thoughtful deployment of the technology.

At this time, I will turn the call over to Nathan.

[Nathan Hirschi, CFO]

Thanks, Mary. Turning to Slide 9, I will discuss the main earnings drivers for the third quarter of 2018 as compared to 2017. Beginning with the positive drivers, earnings increased during the quarter by $0.26 per share, primarily due to the decrease in the effective tax rate resulted from the Tax Cuts and Jobs Act of 2017.

As we have previously mentioned, we record the benefits of the reduction in the federal income tax rate based on pretax earnings, and we flow back the savings to our customers based on sales.

Due to the seasonality of our business, these items have a different timing pattern within the year. However, we anticipate that the tax benefit and the revenue reduction will largely offset each other on an annual basis.

Earnings was also positively impacted by $0.15 per share due to an increase in investment and interest income. This increase was primarily due to the higher realized and unrealized gains on the securities held in the company's Palo Verde Nuclear Decommissioning Trust Funds, or NDT.

Increased retail nonfuel base revenues added $0.11 per share, which was the result of several factors. This increase was mainly caused by higher kilowatt hour sales driven by favorable weather and an overall 1.7% increase in the average number of customers served.

Additionally, revenues for the third quarter of 2018 included approximately $5.6 million of nonfuel base rate increases approved by the PUCT in the company's 2017 rate case. These increases were offset by approximately $10.8 million of refunds to customers in 2018 for the reduction in the federal corporate income tax rate.

Turning to the negative drivers. Earnings declined for the quarter by $0.06 per share due to increased operations and maintenance expense related to the company's fossil fuel generating plants.

As Mary mentioned earlier, this increase includes the carryover cost from maintenance work that began in the second quarter of this year. An increase in transmission and distribution O&M resulted in a decline of $0.04 per share and was primarily due to increases in payroll and subcontractor expenses related to vegetation management in the Gila National Forest for weather prevention efforts.

An increase in depreciation and amortization expense resulted in a decline of $0.03 per share for the quarter. This increase was primarily due to increased plant balances. And an increase in administrative and general expenses reduced earnings by $0.03 per share and was primarily due to the timing of employee incentive compensation accrual.

Now turning to Slide 10. We have provided a comparative analysis of the changes and the average number of customers and megawatt hour sales by customer class for the third quarter of 2018 as compared to the same period in 2017.

Total megawatt hour sales increased by a robust 4.3% for the third quarter. Strong summer weather during the third quarter serves as a primary driver for the increase in residential and small commercial classes. As mentioned earlier, retail sales were also driven by an increase in the average number of customers served.

On Slide 11, similar to our second quarter earnings call, we have provided a chart that illustrates third quarter sales for the past 20 years. This illustrates that our sales have grown by approximately 40% since 1998. As you can see, our warmer weather and continued customer growth helped us establish a new record for the most megawatt hour sales during any quarter. In the third quarter of 2018, we surpassed the previous record, which was set in 2015 by approximately 2%.

Next, I will cover the weather impact in more detail on Slide 12. As you can see on the chart, cooling degree days were 7% above the 10-year average during the third quarter of 2018 and 11% above the same period of last year. In fact, our summer weather included average temperatures that were above average for six months in a row starting in April. As we have previously stated, the above minimum weather helped to boost kwh sales and retail nonfuel base revenues during the quarter.

Turning to Slide 13. I will briefly discuss our capital requirements and liquidity. On September 30, 2018, our liquidity was $347 million, which consisted of a cash balance of approximately $16 million plus borrowings available on our revolving credit facility.

During the nine months -- during the first 9 months of 2018, our capital expenditures for new electric plant were $171 million. In total, capital expenditures were originally estimated to be $236 million for 2018. However, our revised projection is now $266 million.

For the first -- for the nine months ended September 30, 2018, we have credited approximately $22.6 million to customers for the reduction in the federal corporate income tax rate. In terms of dividends, we have paid $42.9 million in quarterly cash dividends during the first nine months of 2018.

If you now turn to Slide 14, I will provide an update on our 2018 earnings guidance. Now that we have our peak earnings season behind us, we have narrowed our GAAP earnings guidance range, $2.25 to $2.50 per share, from $2.25 to $2.55 per share.

We are lowering the top end of the GAAP guidance range by $0.05 per share, primarily due to the decline in the equity markets during October, which was incorporated into our NDT gains and loss projections. The equity markets can be volatile, which makes it difficult to project our NDT gains and losses, which is why we are now reporting non-GAAP earnings as well. We have revised our GAAP guidance range to include $2 million to $6 million of realized and unrealized net gains after tax on the Nuclear Decommissioning Trust portfolio.

We may have a loss in the fourth quarter of 2018 due to the seasonality of our business and the timing differences between customer refunds and the tax savings related to the change in the federal corporate tax rate. And of course, the NDT activity I just mentioned could impact the fourth quarter. On a good note, we have tightened and increased our non-GAAP earnings range to $2.20 to $2.35 per share from $2.05 to $2.30 per share, due to the solid performance we had during the quarter.

That completes our prepared remarks. Mike, can you open the call up for questions?

[Operator]

[Operator Instructions] And our first question is from Lizzie Guynn with Mizuho.

[Elizabeth Guynn, Mizuho]

My question is, so what was the problem identified by the New Mexico Commission with the community solar? And do you guys plan on refiling for that?

[Mary Kipp, President & CEO]

I'm going to let our VP of Regulatory, Jim Schichtil, who's here, to answer that question.

[James Schichtl, VP of Regulatory Affairs]

Well, I think the primary problem was related to both the newness of the application, it was the first community solar application in New Mexico, and then also some opposition with respect to how we were -- or how we were selecting the resources for that program or how we proposed to select the resource for that program.

We're going to have to look at in the future how we proceed with making an application. I think there is some -- there is support for this type of program into New Mexico, although I think, given our plans for a New Mexico rate case next year, it might be that we need to incorporate that, something like that, in our rate case filing.

[Mary Kipp, President & CEO]

Yes. And a little bit of color, Lizzie. We thought this would be something that was really terrific for the state. It's a voluntary program similar to our Texas program, which has been so successful. Interestingly, this one also contained a component that would have been helpful to low-income customers.

So unfortunately, the New Mexico Commission decided not to approve it, which is obviously disappointing because we really thought it was something that was going to be great for the state of New Mexico and for our customers, who wanted a little bit more solar generation in their mix than they otherwise would have.

[Elizabeth Guynn, Mizuho]

Got you. And then, what are your FFO-to-debt metric expectations for this year, and then potentially through the forecast period, if you give that?

[Nathan Hirschi, CFO]

Well, we're still having positive free cash flow for the first 9 months of the year, which is positive. So we haven't really seen -- we've obviously passed back the $22 million of tax savings to our customers, but we're still using an NOL, we're still utilizing our NOL through the first nine months.

So we haven't made significant tax payments to the federal government. So we're still holding pretty solid on our FFO-to-debts, but of course, that will change as we burn through the NOL that we carried into the year and then as we ultimately give back the excess deferred taxes that were not currently flowing back through. So we're still holding pretty solid on cash flow, but that will change in the future.

[Elizabeth Guynn, Mizuho]

When do you expect your NOL to run out?

[Nathan Hirschi, CFO]

By the end of this year.

[Operator]

And our next question is from Claire Singh with Bank of America Merrill Lynch.

[Julien Smith, Bank of America Merrill Lynch]

It's Julien here, actually. Can you hear me?

[Mary Kipp, President & CEO]

Yes. Good morning, Julien.

[Julien Smith, Bank of America Merrill Lynch]

Hey, so quick question or a couple of quick questions. First, can you quantify the AMI opportunity? And then how do you think about the AMI opportunity, given some of the challenges by some of your peers in New Mexico? Is there potential that if you're successful in Texas legislation, that you can actually see a parallel, but not necessarily similar timeline for AMI deployment in each of the 2 states?

[Mary Kipp, President & CEO]

Yes. So we haven't specifically quantified the AMI opportunity. We have looked at recent filings by Entergy though. It should be roughly the same amount of meters. Then looking at those, it seems if we took that as a proxy, it would be about 102 -- -- excuse me, $132 million in capital cost and about $29 million in O&M cost. And obviously, that would depend on the final architecture selected and also where the market is and pricing at the time were it were to go out.

The number we've kind of been using internally in talking to our communities is, maybe having an average residential bill increasing about a little under $3. But these are preliminary estimates, purely based on the Entergy model, subject to change. And obviously, we still need to perform a complete RFP and determine the right technologies and options for our grid, and we still net to get that legislation in place to make sure that we can surcharge for the AMI.

[James Schichtl, VP of Regulatory Affairs]

Yes. And Julien, as you know, that's not in our current CapEx, fiber CapEx projection just because the regulatory -- I'm sorry, the legislative approvals that we're -- work that we will need.

[Mary Kipp, President & CEO]

And in terms of the experience in New Mexico, I mean we all know New Mexico's a very difficult regulatory jurisdiction. We believe that our customers deserve this. This is kind of the standard now. We really want our communities to be able to have this. And so we will propose it in both states. I think that Texas tends to be a little bit easier jurisdiction for us than New Mexico does at this time.

[Julien Smith, Bank of America Merrill Lynch]

Got it, excellent. And then can you perhaps specify here, to contemplate the legislation in Texas? Would that be specific to you all? Or is that actually broader authority to all non-ERCOT utilities? Because as far as I understand, and I suppose, Entergy is the only non-ERCOT utility to deploy thus far.

[Mary Kipp, President & CEO]

That's right. And we have our own subchapter, so the legislation would be specific to us in that regard. However, in talking to, and I don't want to speak for them, I don't know that final decisions have been made yet. But I think there is some interest with some of the other non-ERCOT utilities, of getting similar legislation.

[Julien Smith, Bank of America Merrill Lynch]

Got it. Understood. And then, with respect to New Mexico again, sorry to go back to that. I mean, I suppose on the AMI, is there something about the, just the technology evolution or something like that, that would look different from what your peers file there, again maybe would drive the confidence in getting to a successful resolution this go around?

And then maybe if you could, could you comment a little bit on the statements that -- made by a candidate to New Mexico, with respect to just more broadly your capital deployment strategy in New Mexico, whether it pertains to AMI or RFPs, et cetera.

[Mary Kipp, President & CEO]

So I think that success of any AMI program as it should be, is contingent on whether we can show benefits to our customers. And the reason we want to it is because we believe there are significant benefits to our customers, both in terms of reliability and also rate flexibility and control over their own usage. So if we can demonstrate those certainly, we believe that it should be approved.

At the end of the day though, however, it's up to our regulators. They make the public policy decision. We suggest what we think is best and we go from there. And then as far as the statements by various candidates, I assume you're talking about Mr. Fischmann. I can't comment on what he said specifically.

But certainly, we believe that we operate in a way that we're always looking out for our customers, trying to do the right thing in terms of cost and also trying to do the right thing in terms of the environment. And so we'll just keep doing what we do, and let the cards fall where they will with the regulators.

[Julien Smith, Bank of America Merrill Lynch]

Got it. And I got to ask a last one, I suppose. A little perfunctory, but with respect to the M&A question. Can you comment at least if there's been a decision to pursue, even in an evaluation, I suppose that's been out there in the media of late, but I respect your decision here on commenting.

[Mary Kipp, President & CEO]

So our policy has always been the same as it's always been, which is not to comment on any market rumors. Our Board will consider any such proposal that it believes would be in the best interest of shareholders and customers, but we remain confident in our stand-alone plan.

[Operator]

[Operator Instructions] There are currently no questions in the queue.

[Lisa Budtke, Director, Treasury Services and IR]

Well, thank you for joining us on today's call and we look forward to seeing you at EEI in California. Have a great day and please be safe.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.